Biggest Risk to Commodity Markets in 2020? Politics

USFR 01/04/20 - Farm Journal Report
2020 is full of unknowns when it comes to the markets, but both market analysts and Washington watchers agree on one thing: the political environment will impact the markets in 2020. ( Farm Journal )

As agriculture leaps into the 2020s, the main concerns are still the same.

“The biggest concern is do we have trade deals,” said Mark Gold of Top Third.

From analysts to Washington watchers, all eyes are on what happens this month with China.

“I think the number one concern is whether we get a Phase One trade deal with China,” said Arlan Suderman of INTL FCStone. “Going forward, I think that's really going to shape the tone for the speculative funds that impact prices. It's going to impact demand, and that's what they're counting on. If we don't get the deal I think it sets a bearish tone and everything starts under that colored umbrella. And we have to prove that the demand is there.”

Last week, President Donald Trump tweeted that a Phase One deal will be signed on January 15; a positive sign for a market that’s been burned before.

“Trade policy out of Washington is the biggest concern that I have,” said Bill Biedermann of AgMarket.Net. “I mean, we've seen so much demand destruction from the last two years of tariffs, that tariffs don't work. Tariffs are a way to create a crisis so that you can solve the problem. And that's what obviously we're trying to do. But there's other ways to go about developing trade and negotiating.”

If the Phase One deal with China comes through this month, analysts think the deal is poised to move the markets and change the mood.

“40% of the demand went to China and now it's down to around 20%,” said Biedermann.  “So, we would like to see it go back the other way. I think we have an opportunity to take advantage of that. Corn is probably the thing that I think is got the most potential. If we have the right trade policies. China was a zero importer of corn five years ago to They're importing 7 million metric tons, that'll probably be at 10 million metric tons within a few years. “

“I believe we may be turning a corner here in these grain markets,” added Gold. “We've had four or five years of depressed markets, and maybe now it's time for the bears to go into hibernation, let the bulls take a swipe at things.”

Farm Journal Washington Correspondent Jim Wiesemeyer warns producers that even with a deal, to remember volatility could continue to be at play in 2020.

“Now we know volatility could come right back in because this town reeks of volatility, including a very volatile President Trump,” he said.

The possibility of more volatility is something the market is also watching with caution.

“I think we're going to see more volatility,” said Gold. “I like volatility. We like the opportunities that come with volatility. But we like volatility that's caused in a natural fashion. We don't like it when it's caused by somebody tweeting one thing one day and somebody's tweeting something the next day just adds a lot of confusion to the market.”

While politics could add volatility to the market in 2020, Wiesemeyer says there are several positive points brewing, including other trade deals.

“We have a U.S.- Japan trade agreement that's going to be interested beginning early in 2020,” he said.  

Wiesemeyer also expects the Senate to sign off on USMCA this month and says biodiesel could be a positive in 2020, as well.

“The biodiesel tax incentives, that gives a shot in the arm to that industry,” he said.

Wiesemeyer is also watching possible movement on immigration reform in the new year.

“While the odds are still under 50%, there could be a push to get both the House and Senate together in a room and hash out the differences,” said Wiesemeyer. “I'm not going to give up on that the first six months, even in the political year, that we're going to have with the vote for President.”

With it being an election year, Wiesemeyer knows there is a limited amount of time to get the work done, describing 2020 as “Jekyll and Hyde.”

“There is an opportunity in the first six months for both political parties to continue the ‘December to Remember’ we saw,” said Wiesemyer. “With the things that have happens in the last few weeks, can you imagine if they hadn’t dug their heels in the first 11 months of 2019, where we would be?

While Washington continues to take center stage, market analysts are also watching U.S. crop acres in 2020.

“My biggest concern is that we have crops getting bigger,” said Gold. “With 100 million acres of corn potentially going in the ground, that could be a concern for the market.”

From domestic crops getting bigger, to momentum to the South, Suderman says Brazil continues to be a competitor.

“Brazil becomes a bigger competitor in 2020, Argentina starts to become handicapped by the move back toward a socialist government, which is going to encourage more of a shift towards soybean production,” said Suderman. “One of their industry groups recently forecast that in years ahead, if they move back to those policies, they could see overall grain production reduced by 60 million metric tons. So that's going to make it more difficult for them. But Brazil does become a greater competitor, and they're gearing up for it.”

Looking at more opportunities in the New Year, Suderman says African Swine Fever (ASF) is at the top of the list.

“We estimate the pork production in China is down 25 million metric tons,” said Suderman. “They're getting imports, probably going to be close to 3 million metric tons this year, which is more than twice what they've been in the past. So, they are ramping up imports of beef and poultry as well, but they're still not filling the gap. And we expect that to continue to ramp up as they try to search for more and more sources of meat that they can buy.”

On the dairy front, University of Missouri’s Scott Brown says the same factors that helped milk prices in 2019 have the potential to hinder the markets in 2020.

“I think that a couple of things that play when we talk about 2020, number one, we've seen the supply side contraction that I think got us higher prices in 2019 coming to an end,” he said. “We're flat in terms of cow numbers, we're growing our milk yields. How much production do we end up in the marketplace in 2020 is important that for me is potentially the drag the higher prices in 2020.

As predictions play out, 2020 already looks to be off to a historic start, with the trade talks possibility turning into more trade deals.

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